Lights Out: A book about fall of General Electric
I recently read the book Lights Out subtitled Pride, Delusion, And The Fall Of General Electric. It talks about troubles at GE. It was published in 2021 and GE stock has improved a lot since then. BillG recommended the book in past.
Around the 1999-2000-01 turn of the century (or if you prefer, millennium/ Newmannium) time-frame, magazines made a few lists like best discovery/ invention of human history*, greatest human being of last century (Gandhi, Einstein), best company of last century (GE, Coca Cola), etc. If I remember correctly, GE was voted the best company and Jack Welch the CEO of the century. Soon he planned to retire and the next CEO was chosen. I first came to know about GE around that time.
While I will talk about the book it will be mixed up with my own opinions, perceptions, etc. Some of it will not even be related to the book or GE. And some of this post may come across as unstructured, half baked thoughts. Or a quote after quote from the book. Please bear with that.
While I may use past tense and maybe GE is reduced to a fraction of its former self, it is not dead. And maybe the worst is over.
If interested, as a mental exercise, while reading this post, picture this in your mind: some 10-20 years down the line from today, Apple has gone out of business or your nation has become a failed state, and you are reading the post mortem. What will differ and what will be similar to the GE story?
GE was a conglomerate for most of its existence. GE was a brand. The company had its roots in personalities like Edison (mostly for the sake of name) and Morgan (of JPMorgan). It made great products from appliances like alarm clocks, fans to jet engines and turbines. It was in healthcare, insurance, medical systems (C arm was produced in India if I remember correctly). It owned NBC, and produced Friends, and Seinfeld. It spanned across generations and geographies. If I am not wrong, at one point it was the largest software exporter from India.
While GE was best at engineering, in the corporate world it was popular for management, numbers, dividends, six-sigma, etc. Jack Welch was a big factor in this. The GE brand, logo, the GE way, management/ executive programs, culture had acquired an aura of mythical sort and proportion.
The book talks about GE’s fall from grace. In short, it did not face innovators dilemma- Sony Walkman vs iPod type (maybe renewable energy challenged its oil, power business.) Its business did not get cannibalized. In plain words the businesses were mismanaged. The practices which GE followed (particularly accounting practices), while not outright fraudulent, were ‘success theatre’. They manipulated numbers so that the quarterly results looked good (and had culture and practices which allowed that).
The book does not place a lot of direct blame on Welch but, of course, he’s responsible for some of the mess. It just happened to surface after he stepped down.
‘The GE of the late twentieth century and the fitful first two decades of the twenty-first has stood for more than what it made. It has represented a capitalistic meritocracy, a locus not just of success but of a certain version of virtue— the virtue of targets made, goals surpassed, earnings earned, markets won. And it has stood for a vague but well-marketed notion that, in the unapologetic pursuit of a company’s fortunes, and one’s own, there is a certain uprightness— and a lesson for others. But GE has stood for a well-bred hubris as well.’
‘GE wasn’t the company that most people imagined.’
‘GE’s size advantage was also one of its biggest weaknesses.’
The CEO was also the chairman of the board. So no-one really questioned/ opposed him. ‘The absence of robust opposition also pointed to the broader problem, long cultivated and growing into a quiet crisis within the company, of real candor and self-awareness.’
‘The board was openly dysfunctional, problems at the company were deep and troubling…’
It’s a fact that nothing succeeds like success. If you show great profits, dividends, etc. year after year and decade after decade you will acquire an aura. You derive credibility for yourself, for your strategies, for management style from the brand. And even if the good results are thanks to some loopholes and the numbers are gamed, you start believing the myth. You create ivory towers, echo chambers, and yes men. The book mentions how Jack Welch and Jeff Immelt did not want to hear any bad news. Immelt used to say ‘where’s the guy I used to know’ (who had good news for me). This ‘can you do it or shall I find someone who can’ approach can work both positively and negatively. You know ‘speaking truth to power’ thing.
‘There was no market for hard truths or bad news. Not as far as the guy at the top was concerned.’
Immelt
Immelt was chosen and groomed by Jack. Four days after Immelt became CEO, the 9/11 attacks happened. Later sub-prime crisis happened. And GE Capital suffered. Immelt tried to separate the troubled GE Capital from other businesses. And focused on making the conglomerate more industrial business, more GE Power (turbines, oil & gas) centric. He did away with NBC, appliances, etc. Why did GE move out of appliances business: ‘In a culture in which people were accustomed to tossing more treasured devices like phones and computers after just a few years, no one expected to get a full generation of use out of a dryer anymore.’
People felt Immelt (even before he became the CEO) paid more to make deals happen.
Immelt era did not seem to generate enough cash. The numbers were manipulated (a practice from pre-Immelt era.) But he went on buying shares back to save on dividends and yet promised a dividend target which he or, later, Flannery could not meet.
‘Jeff Immelt will not be remembered for wisely deciding how to spend GE’s cash.’
‘Under Immelt, the company believed that the will to hit a target could supersede the math…’ (An aside: I am never comfortable with American way of saying math instead of maths.)
GE Capital
GE Capital, ‘in the months leading up to the crash (sub-prime), had been effectively the seventh-largest bank in the country, but its operations had been almost impenetrable. It was a “black box,” everyone had said with a shrug— until the black box had almost dragged the company down for good.’
‘The rigorous protocols of the banking industry also bore little resemblance to the customs that prevailed at GE Capital. Like the parent company, GE Capital’s system for evaluating and monitoring deals was rooted in personal accountability more than enterprise risk.’
‘The world in which Jeff Immelt had thought he would be leading GE had been turned upside down. The recession and the uncertainty that followed the terrorist attacks had dampened the global growth on which GE’s industrial businesses depended. And changes to accounting rules in the wake of the Enron scandal… had eliminated an easy and reliable source of paper profits to smooth over rough periods.’
GE Capital had to be bailed out post sub-prime crisis. And had to agree to some oversight from federal agencies/ bodies.
‘The investigative team soon found a slew of questionable practices that showed the scope of GE’s ability to stretch, manipulate, and ignore accounting practices that are required of all public companies for the protection of investors.’
And ‘in addition, the broader market had lost its former patience for letting big industrial companies mess around in the risky business of finance.’
‘…gut-driven management style could be rationalized— or explained at the very least— to the industrial divisions. But many of Immelt’s grand visions fell flat at Capital, and that reception may have contributed to his distaste for that business. The marketing-based commercial strategy Immelt was imposing on GE’s industrial units didn’t really translate to financial services. And his optimism-driven management style, all pep talks and insistence that sheer determination to prevail could surmount any obstacle, didn’t go over well with a division that measured success and failure in fractions of a percentage point and whose analyses almost always turned on quantitative factors.’
Predix
GE’s Software foray(Predix); Immelt era. ‘Even GE and Predix had to obey laws of physics that weren’t susceptible to marketing.’
‘… the company was unlikely to turn a profit from customized code, since it usually couldn’t be sold again to someone else. Software businesses usually turn a profit by selling uniform programs that can be sold many times over once they are built, not by designing unique programs, customer by customer. But even making those bespoke sales required something else: a viable product that GE’s customers— oil drillers, airlines, power plant operators, freight railroads, hospital chains— actually wanted. GE didn’t just pour money into Predix— it smothered the project with cash. But without a coherent strategy and well-thought-out processes, the product development path was a wasteful one. GE’s plan to move fast, produce a viable product, and then perfect it in the field got bogged down partly because of the size of the effort.’
‘Instead of charging a small team with developing the best product and then letting the operation grow with the product’s evolution, GE set up a huge organization that wasn’t quite needed yet. Development was often paused or delayed in order to start the process over entirely or just to stabilize the systems.’
Domain knowledge
GE prided itself on producing great managers. But the generalist manager approach did not always work. Sometimes domain expertise was lacking.
‘GE was a siloed organization, in contrast to the image it presented to outsiders.’
‘Some of his colleagues suspected that Immelt’s background in sales and the industrial units had left him with a fuzzy grasp of the financial basics. His positions in those businesses had been meaningful, and he had been responsible for their finances. But GE’s matrix management structure had assigned others to be the crucial arbiters on some of the most complex financial decisions in which he had been involved.’
‘Immelt struggled with basic concepts— the difference between secured and unsecured debt, for instance, which was fundamental to a lending operation like GE Capital.’
‘Their attempts to explain to the boss what they feared he didn’t fully grasp were proving futile. He always waved away their doubts.’
‘In the eyes of Capital workers, the role of the sales organization shifted when Immelt became CEO. Salespeople could push around finance people, but they weren’t held accountable for outcomes. If a deal closed, it was celebrated as a success of the salespeople. If it fell apart, the blame seemed to fall on the risk and finance team. The culture created by this dynamic led to executive promotions of people who were underqualified for complex finance jobs. Some were not only unprepared for their roles but also unfamiliar with basic finance concepts, according to people inside the business at the time.’
And this, of course, was not limited to Immelt.
When under Immelt GE went full throttle into oil and gas (turbines), etc. they did not consider the effects of what will happen if crude oil prices went up/ down. I am not knowledgeable much about it, but as per the book, this is a very basic consideration and this mistake cost GE Power a lot. Same for acquisition of Alstom for which, after announcing the deal, GE had to fight/ accommodate the French bureaucracy and ended up paying much more than original estimate.
There were attempts at telling a story. Slogan was changed and buzzwords were created. ‘Ecomagination’, for example. Why do new leaders change slogans, come up with buzzwords, coin phrases? The spoken and written language- say English or any other business language- is rich enough. But I think it’s the easiest way of re-arranging pieces on the chess board (an example of bike shedding). I guess it helps them say I have arrived, change is in the air, fall in line or else, etc., and in the process identify who their cronies are. In the corporate world the show of activity instead of actual substantial activity makes you sick.
Another such practice is changing the org structure.
Leaders also seem to introduce themes. For example, GE is an industrial company, we are getting out of entertainment business. Such ideas are logical, of course. They help the company align. You must have come across such ideas: we are going lean, cloud native, etc. We can easily identify such things by the narrative: ‘in past we slipped on <diversity-and-inclusion/Asia/CI-CD/use-of-plastics>…’ or ‘if we miss the coming <mongodb/microservices/> wave…’, etc. There is nothing, absolutely nothing wrong with such things. There is no better way to align a large group than Bezos’s API mandate or JFK’s clear goal setting: ‘before this decade is out, of landing a man on the Moon and returning him safely to the Earth’. But we need to understand the dynamics. When people go all-in on such things sometimes they loose responsiveness and at times it’s too late to notice that such initiatives have stopped working (or, in some cases, negatives have overshadowed positives). In general, as Bertrand Russel said, ‘all movements go too far’. Then (in my experience after 3-4 years) some organization restructuring happens and new leaders introduce some different themes. GE did a bit of that- for example, ‘Welch’s core mission was to attack complexity, ripping out layers of bureaucracy that had built up inside the company and making the massive company more nimble’, or Immelt moving out of NBC, Capital and into Power, or Immelt wanting GE to become more start-up like. And sometimes it helps if you are able to tell a story around such ideas. The thing is that the narratives need content. In GE’s case I think investors felt like it’s a lot of just fancy-shmancy stuff… ‘like a big budget movie with a story that goes nowhere’. Like Elaine, the market would have none of that.
‘A carefully curated self-mythology had always been central to GE’s methods, going back to Edison. GE had marshaled the tools of public opinion that had marked every era…’ There is a line in the book ‘The narrative of success begat success’.
‘The premise of GE’s every communication to investors was that its management was so strong, and its vision of the entire conglomerate so penetrating and expansive, that its stock was a gamble worth taking. Even in the inevitable event that something somewhere went wrong, its protocols for working out of trouble would limit the amount of long-term damage and preserve its investors’ money.’
‘In the weeks and months after Immelt left GE in 2017, a parade of negative stories and embarrassing disclosures revealed major problems that sent the company’s stock into a long decline. Conversations about what happened inevitably shifted to blame, and Immelt was the obvious target. He had spent sixteen years at the top and, regardless of what Welch had left for him, he’d had plenty of time to fix it. But there was plenty of blame to go around. Perhaps most of it should be placed on the board of directors, the independent group that oversees the CEO.’… ‘It had been their job to know, however, and their job to ask the hard questions that weren’t fully answered, or were never asked at all. It was their job to oversee management, and it was their job to protect investors from fatal hubris. Still, the path ultimately leads back to Immelt. As chairman, he was also responsible for steering the board.’
‘There is also plenty of blame to put on GE’s top-down culture, which Welch and any number of midlevel managers used to their advantage as readily as Immelt did.’
Post Immelt era
‘Under Flannery, the message reverberating around the headquarters and the entire company was: no more success theater.’
Flannery came across a lot of problems; particularly at GE Power, Insurance (which people believed GE had sold years ago). GE Power profits, on close examination, seemed to exist mostly on paper. ‘Power was building inventory even as the global market for turbines was slowing. “It was like they drove off a cliff,” Flannery later told an observer, “and there were no skid marks.”’
‘Immelt often made it a point to go around the board table to ensure that everyone had a chance to comment on a strategic decision, but directors rarely challenged him. To Immelt, this was proof that he solicited input and encouraged debate.’
‘Some GE lifers saw Flannery as a tragic figure, taking the fall as he tried to clean up years’ worth of others’ mistakes. Flannery has told friends that he remains certain that there was no quick fix for the serious problems he unearthed.’
‘If Immelt was known for his vaulting optimism, Flannery soon became known for his indecision and endless analysis. Few decisions, even major ones, were final. A critical strategic move, like the separation of a major division, could be made, only to be reassessed at any time. Flannery’s style was quickly grating on top executives who worked with him.’
‘Jack Welch continues to privately rage about the man he chose to succeed him. The aging CEO still likes to say he gives himself an A grade for the way he ran GE, and an F for his choice of successor.’ (Welch passed away some time back.)
‘The SEC didn’t name the GE executives, but the order makes it clear that the misbehavior stopped with Flannery’s first full quarter as CEO, the fourth quarter of 2017.’
Post Flannery, Culp became (and still is, as of today) the CEO. First outside CEO though Flannery had brought him on the board of directors.
The authors end the book with: ‘But even the success of Culp’s efforts would undermine a central tenet of GE’s oldest and most precious belief: that it knew how to manage any business and could teach any of its own to do so. In the end, when General Electric most desperately needed a manager to save what was left of the company, it had to go looking somewhere else.’
This ending is the most biting and maybe perfect one in my opinion.
A few additional impressions. The book could have been edited better. For better reading experience and for the layman like myself the chapters are kept small and paragraphs are also small. But this has a side effect that some information gets repeated and a bit of to and fro happens. Some flow gets interrupted. Maybe the chapters were written by individual authors instead of jointly.
The book does not mention this. But in my mind, Immelt seems to be the kind of manager/ leader you used to read about in trashy self help books. Shoulders back, chest out, firm handshake, make and hold eye contact, interest your audience by talking about sport, etc.
Any cash rich company can have inefficiencies, bad practices. (Commercial paper- a form of short term debt in GE’s case comes to mind along with executive perks, etc.) It is better to get rid of these when there is time. When cash crunch occurs some of these things are first to go (company cars). But some others are difficult to get rid of. And sometimes you end up letting wolf inside the door (regulators, watchdog, seat on the board, etc.).
A lot of these things appear obvious or common sense in hindsight. I guess none of the leaders wanted to do any harm to the company. Welch, Immelt, etc. The business of conglomerate was complex. And most certainly even after reading a book or two we may not fully understand/ appreciate the complexity. But if a CEO gets 15-20 years to shape up the company with uncontested power, like Welch and Immelt did, couldn’t they have done better? Immelt was almost always firefighting. But couldn’t his shortcomings (not enough knowledge about Capital business, not factoring in the crude oil price hike) be overcome? I guess people fall in love with their own images and approaches. When they reach top, they stop listening. Some of this my-way-or-highway approach must be necessary to avoid second-guessing everything. But I think you should be open to one or two levels above and below your own level. (For example, in Toyota Production System a worker on shop floor could bring assembly line to halt if he/she found a problem.) A CEO who takes the board for granted is better without having that board or the one who isn’t willing to listen to bad-news from his subordinates will have to hear that news from the market. I think life is an incessant flow of choices (irrespective of whether free will exists or not). It is all about to choices we make and paths we take. And the management at GE made bad choices for long.
A few generic reasons I can think of behind such mess:
- The people involved are optimizing for their self interests- career paths, perks, money, power, etc. They know their limitations, and that business, companies are too impersonal, their time limited, etc. ‘It’s just a job.’ I don’t think there is anything wrong with that. But you can do that with a bit of professionalism.
- While they are in the system, they become part of it and cannot appraise it impartially.
- People underestimate complexity because they don’t understand it. Even when they understand complexity, their brains by evolutionary pressures may abstract away most of it.
- People have an illusion of control and can become cocksure about the things they do, believe. In case of uncertainty, they double down on their approaches.
- People often optimize for easier ones of the many available metrics and when metrics become targets and can be gamed, they stop being good metrics.
- People, when they can’t answer a difficult question, tend to substitute the difficult question with an easier one which they can answer. This is substitution principle from Thinking, Fast and Slow. Any answer you can come to questions like: should we have NHS like healthcare system, should we have minimum wages, should we tax the rich more, should primary education be…, etc. is likely to be an answer to a substituted simpler question (unless you are a domain expert). Perhaps this is why companies, as first actions divest from some segments, fire employees, and even have awards and promotion cycles, etc.
- Systems influence people and people influence systems. Both these are dynamic.
- Celebrity culture, hero’s blind worship is a factor.
- Some of these things appear to be sort of directed acyclic graphs. It may seem that there’s an inevitable directionality to them, ‘it was bound to happen like that’. But as Steve Jobs said you can connect the dots only in hindsight. There’s no way one can be sure how dynamic systems will evolve. If we travel back to K-T boundary and the earth is hit again by same asteroid/ comet at same time and place, there is no way you can be sure that some 66 million years later, girls would want to impress boys by talking about NVIDIA stock.
- GE people were not particularly different. You and I fall for these things all the time.
Borrowing money (from VCs, funds, loans, market) is starting to look less appealing to me. And yet companies do need to borrow money from market and other sources to expand, sustain, etc. The founder of Ikea borrowed 500 Krona to purchase and then sell fountain pens. He repaid the money, and Ikea, since then, have had no outside financing, no debt financing.
Lastly and most importantly I think it’s the culture that matters. Of course, it’s a vague and open-to-interpretation concept. And culture is generally not stagnant; doesn’t remain unchanged for long. But many of your actions are rooted in an existing culture or are aspiring towards some culture. And every action updates the culture- what is acceptable and what’s not, what is rewarded and what isn’t, are you open to criticism, debate, difference of opinion, what you do when things go wrong, etc. Certainly, GE had a culture problem. I have seen a couple of rotten companies and maybe it boiled down to this vague idea of culture. This becomes particularly noticeable when you are inside and company’s fortunes turn (for better or for worse).
*Best invention/ discovery was electricity, wheel. Electricity seems ok. But wheel? No way. The best was probably the second wheel. Have you seen the idiots on unicycles? (Rich Hall gag.) Surprisingly, AFAIK, evolution has not come up with a wheel (some sea-bed dwelling fish have pods closely resembling wheels but not exactly wheels- your know, translate-to-rotary motion, friction reducing, etc.). Evolution works on the good enough principle, doesn’t want to perfect things/ mechanisms.
TODO: A post about power.
While updating the post today, I ended up using Seinfeld’s ‘big budget movie with a story that goes nowhere’ over Shakespeare’s ‘full of sound and fury signifying nothing’. And I love how quotable Seinfeld is- along with Wodehouse, Calvin And Hobbes and P. L. Deshpande. I have heard similar- quoteworthiness- about Dune (purchased but unread). And you have no idea how I resisted putting Immelt’s cavalier approach in terms of Monty Python’s ‘Tis but a scratch/ flesh wound. But I have to say, at times when I understand him, I just love Shakespeare.